Eye on the Market j February 19, 201 J.P.Morganj Fifty Trades of Grey: an illustrated story of investment, temptation, addiction and the cost of money Q I US retail sales were better than expected in January, despite higher tax rates, as the US consumer is still more active than European counterparts (1" chart). It's too soon to see the full impact of higher US income and payroll tax rates, but a Q4 jump in real wages, improved household balance sheets and a turnaround in housing may offset part of the headwind. We'll see in a couple of quarters. Meanwhile, in the SOTU address, the President talked about raising revenues. It will be interesting to see where they come from: after the recent tax act, top quintile tax rates are now 5 times higher than the second quintile, up from 2x in 1979 as progressivity increases further (2nd chart). Everywhere I go, however, there's a different topic on everyone's minds: what will happen when the Federal Reserve stops purchasing tens of billions in Treasury and Agency debt every month? It's possible that with a sufficiently dovish Chairperson replacing Bemanke in 2014 that they will never end, and that the US will end up like Ireland, with its Treasury perpetually beholden to its Central Bank; but I don't think so. The autobiographical story below is my view on Fed purchases and their impact on the world of investing. Auto sales: U-turns and Down-turns Percentof total population. 3 month moving average 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% Europe US 1998 2002 2006 Source: BEA. Census Bureau, ECB, EuroStat. 2010 Average federal Individual Income and social insurance (RCA) tax rate by Income group, Percent 30 2013E 25 Top I 20 Top Quintile 15 Middle Quintile 10 5 Second Quintile 0 Lowest Quintile -5 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 Source: CBO, WC. JPMAM. Lowest quintile negative due to credits/transfers. Fifty Trades of Grey "I was always the